This comes on the heels of revelations that allocations to U.S. stocks have fallen to their lowest levels since 2008 according to Bank of America Merrill Lynch’s global fund manager survey for April.
This drop has been swift, with positioning in U.S. equities dropping to a net 20% underweight from 1% overweight a month ago. The strategists behind the survey point out that this allocation is below the long-term average. What could be behind such a steep market change? For one, American stocks have become quite expensive compared to other countries, and on top of this, there is a growing worry about delays for U.S. tax cuts that many are anticipating.
“A net 83% of investors think [the] U.S. is the most overvalued region, the highest response on record,” said BAML strategists Michael Hartnett and Jared Woodard in a note. To give a bit of comparison, back in early 2008, the S&P 500 SPX, +0.13% was on its way to a big loss for that year. The benchmark for U.S. stocks would eventually hit its bottom in March of 2009, which is when many perceive the current bull market as having begun.
Of course, if American stocks are beginning to bleed interest, it has to be going somewhere else. So, where are fund managers looking to put their investments? The main attention seems to be going for eurozone stocks, which may be surprising considering the hotly combated French presidential election, which has its first round of voting on Sunday. The rotation last month to eurozone stocks from U.S. equities was the fifth largest since 1999.
However, this surge in European stocks may be short-lived. Respondents to the survey see a 5% or 10% drop for European stocks if populist candidate Marine Le Pen becomes France’s next president. However, the market shows that many are not as nervous about a potential disintegration of the European Union, which may have been on the table after the Brexit vote.
Other facts from the survey include that 67% of fund managers expected a bear market for stocks if the 10-year Treasury yield rises to a range of 3.5% to 4%.